Managing Financial Resources and Decisions

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Managing Financial Resources and Decisions Table of Contents Introductions——————————————————————————-3 2.1 a) Calculation for the Cost of Ordinary Share Capital—————————-3 2.1 b) Calculation for the Cost of Preference Capital———————————3 2.1 c) Calculations for the Cost of Debenture Capital after Tax———————3 2.1 d) Calculation for the weighted average Cost of Capital of the company——4 2.2 Importance of the financial planning————————————————4 2.3 Informational needs of Directors, Senior Managers and Junior Managers—–5 2.4 Impact of the financial statements————————————————–6 Bibliography———————————————————————————7 2.1 Introduction The financial Report is provided by Brian Harris Chartered Accountants to assist our client, X Limited, in understanding the results of financial condition and operations calculated in order to facilitate better and more effective decision making. 2.1 a) Calculate the cost of Ordinary Share Capital: Dividend Growth Model: Po = £2 = 200 p Po=market price for each share Do = 10 p Do= Company payment g =8% = 0.08 g= growth rate in dividend 2.1 b) Calculate the Cost of Preference Share Capital: Pp = £ 1.20 each Dp= annual dividend of preference share Dp = 12 % = 12/ 100 =0.12 Pp= market price of the preference stock Kp= cost of preference share capital 2.1 c) Calculate the Cost of Debenture Capital after tax: I = 10 %= £ 1, 000 I= interest rate Taxation= 20% t =taxation Pd = £125 Pd = price of debenture Kd= cost of debenture capital after tax 2.1 d) Calculate the weighted average cost of Capital of the company:

MV (market value) CDC %
OSC (Ordinary share capital) 2000 x 2 =4000 13.40
PSC ( Preference share capital) 1000 x 1.20 = 1200 10.00
D (debenture) 125% x 1000 = 1250 6.40
COC (cost of capital) 6450

WACC= WACC= 2.2 Importance of financial planning The financial plan is considered by all marketers the cornerstone or the spine of the business, without the company cannot run properly and profitably. So there are some important points that need to be followed to understand why the financial plan is important and how it helps the business. First of all, a plan is put in place in accordance to the goal the business has set and is working to reach those goals. For instance, the income in the business can be administered better, between the tax payments, any expenditures and even savings. The cash flow can be controlled and budgeted properly in the business’ favour. A raise of the cash flow means a raise of the capital; that will help with investing in the business to increase the financial situation of the business.

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